- If you are acquiring a franchise from a current franchisee, then you must perform due diligence on the franchisee’s business as well as the franchisor.
Never buy a franchise from a current franchisee without talking to the franchisor as well. Some franchises cannot be resold without the franchisor’s permission. Others cannot be resold under any circumstances. In some cases a new franchisee must pay the franchise fee again.
- Franchisors usually provide a financing package to franchisees that can make owning your own business easier than if you started it on your own. The franchisor, because of his history of proven success with similar franchises takes the business package to a financial institution and “sells” them on the businesses ability to pay the debt necessary to acquire a franchise. The financial institution then provides the franchisor with a pre-qualification for any new franchises that they can sell. In order to obtain the financing through the franchisor’s financial institution there will of course be requirements for a portion of the acquisition price to be paid from the potential franchisee’s current assets and the potential franchisee will have to have a minimum specified net worth and have to go through the normal credit checks. But because the franchise’s concept is already sold to that financial institution it takes very little time for approval, providing that the franchisee meets the basic credit criteria.
- There may be multiple levels of Franchisees within a franchise company. Some franchisors will market franchises to “master” franchisees others will market their franchises directly to individual franchisees and others may do a combination of both. A master franchisee is one who has purchased a franchise for a geographic area. It might be an area as small as a city or county or as large as a state or country. The master franchisee may act in a similar fashion to the franchisor as he may sell franchises within his geographic area to other independent businessmen or he may open, own and operate all of the franchises within his geographic area. Some franchisors will own and operate their own company stores. They manage their own operations for three primary reasons.
- To test new products and/or services
- To create a profit history that they can market
- They have seized or bought back a franchise
The following chart outlines a typical franchise ownership structure.
The Federal Trade Commission has prepared a booklet on buying franchises. The document can be downloaded from their web site. Also, several states regulate the sale of franchises. Check with your state Division of Securities or Office of Attorney General for more information about your rights as a franchise owner in your state.